Trial of Former Pimco Executive Begins

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The New York Sun

A Manhattan jury will decide whether an executive at a mutual fund betrayed his many shareholders by allowing a single wealthy investor to flout the trading rules.

The trial of a former executive of Pimco funds began yesterday in U.S. District Court in Manhattan. Stephen Treadway, who was the CEO of one of Pimco’s divisions, faces civil charges brought by the Securities and Exchange Commission. The lawsuit, filed in 2004, emerged from Attorney General Eliot Spitzer’s investigation into the practice of “market-timing” in the mutual funds industry.

Attorneys for the SEC are trying the case against Mr. Treadway, 58, before Judge Victor Marrero.

A lawyer for the SEC, Jose Sanchez, accused Mr. Treadway of betraying the trust of investors between 2002 and 2003 by agreeing to a deal that allowed a single preferred investor, hedge fund Canary Capital Partners, to frequently buy in and out of the fund, which is known as market-timing. Those trades, the SEC alleges, were a concession that Pimco made in return for a $100 million investment by Canary.

Mr. Treadway had the responsibility of overseeing the unit entrusted with policing market-timing. Those frequent transactions are not against federal law. However, the company’s advertised policy is to restrict them as they can lead to increased costs paid by other shareholders.

“Defendant Treadway is the gatekeeper whose job was to look out for the interests of Pimco shareholders,” Mr. Sanchez said during his opening statement to an eight-person jury. “Defendant Treadway betrayed that trust by creating an unlevel playing field in which the same rules did not apply to all investors.”

But the attorney for Mr. Treadway told the jurors that Mr. Treadway behaved appropriately given what he knew about Canary’s trading patterns. The lawyer, Alan Levine, said that Mr. Treadway had even sought to close the accounts once the frequency of the transactions in question became apparent to him.

Mr. Levine also said that Mr. Treadway, who did manage the Canary account, was not aware of an alleged secret agreement with Pimco that allowed Canary to make his frequent trades in return for his heavy investment.

“The secret deal was kept secret from Steve Treadway,” Mr. Levine said.

Last week, a second executive connected to Pimco funds, Kenneth Corba, reportedly settled civil charges with the SEC for $200,000. Mr. Corba, whose trial was to be jointly held with Mr. Treadway, is expected to testify.

Pimco is owned by the German insurance company, Allianz.


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